Complicating monetary management

THE State Bank of Pakistan is very clear that developments in the first half of the current fiscal and the outlook for the remaining part of the year justify further tightening of the monetary policy. Aggregate demand pressures remain high as both the fiscal and the external current account deficits are likely to be higher than original projections. The estimated growth of money supply on an annualised basis by 19.2 percent (relative to the 13.7 percent target) underscores the need for tight demand management. According to the MPS, inflationary pressures are likely to build up further, with headline inflation projected in the range of 8.0 percent for 2007-08 or higher by 1.5 percentage points than the target. “In addition to the impact of reserve money growth on core inflation and difficulties in curbing food inflation, inflationary trends are likely to be impacted adversely due to pass-through of increase in international oil prices”. In fact, the State Bank, which in the past used to talk about maintaining a balance between growth and inflation containment is now so much concerned about the emerging inflationary trends that it has openly stated that risks to inflation outweigh the risks to growth in the near future. Faced with such a scenario, further tightening of monetary policy was almost inevitable. The discount rate or the rate at which the scheduled banks seek temporary accommodation from the central bank has been raised by 0.50 basis points to 10.5 percent, while Cash Reserve Requirement (CRR) has been enhanced by 100 basis points to eight percent for deposits of maximum one year maturity with effect from 1st February, 2008. Deposits of over one year maturity will, however, remain zero rated to incentivize the banks to mobilise long-term deposits. Some relaxations have, nonetheless, been offered to meet the exigencies of the situation.
The State Bank will develop a relief package for various private and public sector enterprises to meet the losses following the events of December 27, 2007. Effective January 1, 2008, the State Bank has already introduced a new Long Term Financing Facility (LTFF) to encourage export growth. We feel that the monetary policy strategy of the State Bank and the reasons given to justify it in the MPS are quite appropriate to the situation, though the government may feel a little uncomfortable about sharing the blame for indirectly contributing to the increasing inflationary pressures in the economy. In the past, the State Bank used to be less critical about the government sector’s behaviour because its expansionary impact was manageable, but the developments during the current year have left it with no alternative other than almost openly stating, thanks to its autonomous status, that fiscal mismanagement is the real culprit, adding to the country’s financial difficulties. Total tax collections by the FBR during the first half of the current year were only 6.5 percent higher than last year or even lower than the nominal growth in GDP, which is a clear indicator of poor tax mobilisation efforts. The latest available data from the Ministry of Finance for Q1-FY08 indicates a widening fiscal deficit reaching Rs 158.1 billion, which was 82.3 percent higher than that of the corresponding period last year. Growth in expenditures (by 38 percent) has outpaced the growth in revenues (by 22 percent). Growing requirements for subsidies in the wake of soaring international oil prices, higher interest payments on domestic debt and increased development costs were the main reasons for escalation in expenditures.

New low in depravity

TERRORISTS in Iraq hit a new low on Friday when two mentally handicapped women were used to carry explosives through a security check and were then blown apart, either by remote control or a timer set in the bombs. The depravity of this crime is staggering. It bears all the hallmarks of Al-Qaeda both in terms of its amorality and wicked cunning. However, the Americans and the Iraqi authorities cannot be as sure as they claimed to be, within hours of the blast in which more than 90 were slain and scores wounded, that the monstrous act was perpetrated by Al-Qaeda fanatics. There are other evil forces at work in Iraq. It might even be that this crime was designed to draw attention to Bin Laden and his followers, while the guilty were pursuing their own agenda. There is no doubt that these two poor women were used by the terrorists precisely because they were mentally handicapped. The police who let them pass without searching them knew the women and doubtless treated them kindly. The terrorists had clearly seen how the pair were never suspected and, therefore, hatched their plot to dupe the couple into carrying explosives. The women had child-like intelligence. Their use was little short of actually sending a bomb-laden child into a crowd. That would be the final frontier of depravity.
The US analysis of this crime included the thought that Al-Qaeda was running out of suicide bombers and so was turning to the mentally handicapped. This is hardly reasonable. From now on it can be expected that the authorities will be paying close attention to such people and yes, perhaps also to children. The human bomb campaign could not, therefore, be a substitute for the suicide terrorist. Besides which, the Americans have also been talking recently about large numbers of brainwashed recruits to the ranks of the fanatics. Both claims cannot be right. Washington is obviously eager to bolster its claim that the troop surge had indeed reduced violence. This heinous crime in Baghdad comes after a prolonged period of relative quiet in the capital. It undermines Bush’s claims about increased security. Indeed, those claims in themselves must have been a spur to the men of violence to pull out all stops and mount a large outrage. The propaganda value of such a strike has been magnified by Bush’s boasting. The disgust all decent people feel over Friday’s blast will not deter the terrorists. They are beyond normal human feelings. But hopefully, Iraqis will unite in their refusal to be cowed by these thugs and redouble their efforts to root them out of their society. It must be hoped that Prime Minister Nuri Al-Maliki was stating a fact when he said that such attacks would only increase the Iraqi military’s persistence in restoring security to the violence-ravaged country.

—Arab News